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Economies of note - 18th July

Written by Ian Dobbs on July 18th, 2014.      0 comments

The Reserve Bank of Australia released the minutes from their last meeting on Tuesday afternoon. There was nothing ground-breaking in them with the bank repeating the call that the most prudent course of action is likely a period of stability in rates. They still see the Australian dollar as high by historical standards, but qualified it by saying the NZD and CAD were also high and that they have been surprised by the low level of the USD. They believe economic growth will be a little below trend over the coming year, but that there is a significant amount of monetary stimulus already in place to support the economy. There was little overall reaction to the minutes in the market with the growing expectation that the RBA are on hold well into next year. Other data released this week has also failed to have much impact with only a few second tier figures drawing passing attention. New motor vehicle sales were stronger than expected as was the CB leading index, while NAB quarterly business confidence showed a small drop from the previous figure. The only data set for release next week is inflation on Tuesday. Ahead of that however, we also hear from RBA governor Stevens, and Assistant governor Debelle.

New Zealand
It has been a very interesting week for New Zealand and the New Zealand Dollar with two key pieces of data materially impacting the current outlook. First up was Tuesday night’s dairy auction which resulted in another 8.9% fall in prices. In NZD terms, dairy prices are now 40% below the peak seen earlier in the year. Until this week the NZD had shrugged off the declining prices, but this latest result has seen the currency start to take notice. Without a shadow of doubt, weakening dairy prices will have widespread implications for the NZ economy going forward. Dairy farmers will have to brace for a big fall in profitability over the coming year and that will have plenty of flow on effects. The most recent pay-out forecasts for 2014/15 are around the NZ$6/kg area. The market was still digesting this news when only a few hours later we got the latest reading on inflation. The quarterly figure of +0.3% was unchanged from the previous reading, and below the markets expected result of +0.4%. Looking into the detail proved to be weaker than the headline indicated with few signs of domestic inflationary pressure outside of housing. The combination of softer than expected inflation and continued declines in dairy prices will make the Reserve Bank think hard about tightening again next week. That’s not to say they won’t pull the trigger, in all probability they still will, but it is now a lot more finely balanced than before and the currency has started to reflect that declining from the extreme levels seen last week. If we do get a hike from the RBNZ next week, it could well be the last one this year as the central bank pauses the tightening cycle to see how thing develop over the coming months. Either way next Wednesday’s meeting should prove to be very interesting.

United States
Fed Chair Janet Yellen delivered her semi-annual testimony to a congressional committee this week which drew much attention. The market views Yellen as very “dovish” in general and in her testimony she was certainly very cautious in her assessment of the economy and the outlook going forward. She said a high degree of accommodation is still appropriate and they will have to make sure the economy is on a solid path before hiking. She warned the Fed had been fooled before by ‘false dawns’. She did however, make some comments that would have given heart to those expecting a stronger USD. She stated “If the labour market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned”. This is key because the labour market is improving at a faster rate than expected, and last night’s weekly jobless claims confirm a solid trend is developing. Earlier in the week we got retail sales data that was a little disappointing printing at +0.2% vs +0.6% expected. But looking into the detail showed the result wasn’t that bad, and there were also positive revisions to previous figures. Other data this week of note came in the form of a couple of regional manufacturing surveys (used a lead indicators for wider manufacturing) that showed significant improvement, and housing starts for June which came in below expectation. Next week we get inflation, existing home sales, new home sales, and durable goods data.

United Kingdom
A couple of key releases this week from the UK proved to be very interesting. The first was inflation data released on Monday evening. The market was looking for a small uptick to 1.6% from 1.5% previously, but the actual result was an eye widening 1.9%. Core inflation, which strips out food and energy was actually up 2.0%. The Bank of England has an inflation target of 2.0% and that is now under threat. This combined with the booming housing market, a strong economy and substantial falls in unemployment make the case for higher interest rates a strong one. We can expect some real debate with the Monetary Policy committee over the coming months and a hike by the BOE could easily come sooner than expected. The UK Pound took heart from the data and made some decent gains. Wednesday night’s release of employment data didn’t have the same effect on the currency however, even though the result looked encouraging. Unemployment claims fell by much more than forecast coming in at -36.6k vs expectations of -27.1k. This was a good result but the market chose to focus on another detail, and something that has been a feature of the recovery so far. Average earnings figures showed the slowest growth level since May 2009 printing at +0.3%, with the ex-bonus number the slowest on record. Earnings growth has been running consistently below inflation for years now and it is a concerning trend that threatens the sustainability of the economic recovery. Next week we get the BOE minutes along with retail sales and GDP.

It has been another week of uninspiring data from the Eurozone. Industrial production numbers were disappointing, German economic sentiment declined, the trade balance came in below expectation and inflation remained stagnate at 0.5%. On top of this we have had Portuguese banking concerns and it’s anyone’s guess how deep that problem will run. The only upside to all the negative news is that the Euro has lost some ground this week having remained surprisingly stable since the ECB took rates negative at their last meeting. Europe has a long road ahead and we could easily see further banking concerns when the ECB release the stress tests conducted on the banking sector. Those results are likely a couple of months away, but just last night the ECB’s Constancio was on the wires saying some banks will fail the review. Next week the focus turns to manufacturing and service PMI data along with the German IFO business climate survey.

The Bank of Japan (BOJ) held their regular rate meeting this week with no change to the current policy settings, as was widely expected. The bank kept its assessment of the economy unchanged, believing the moderate recovery will continue as a trend with the effect of the sales tax hike seen gradually subsiding. That latter point is certainly up for debate. A recent Bloomberg article suggest growth will come crashing down in the second quarter after the pre tax hike ramp up of quarter one. The consensus for Q2 is for GDP of -4.85% but it could easily be a lot worse than that. We are certainly entering a critical phase of the Japanese recovery and data over the coming months will be closely scrutinised. Next week the focus turns to the trade balance and inflation figures.

Wednesday night saw two key releases from Canada. This first was manufacturing sales that came in better than expected at 1.6%, although the impact was limited as the market awaited the outcome of the latest Bank of Canada rate meeting. The BOC released a statement saying they are neutral with respect to the timing and direction of the next change to the policy rate, and it will depend on how new information influences the outlook and assessment of risks. Governor Poloz made a point of saying uncertainty in the current outlook is a major factor in companies’ unwillingness to increase capital investment. Unfortunately it sounds like the BOC are just as uncertain about where the economy is going and they believe serial disappointment with economic performance during the past several years is to blame for this situation. Tonight we get inflation data and wholesale sales figures, and next week the only release is retail sales.